TMI Blog1959 (5) TMI 43X X X X Extracts X X X X X X X X Extracts X X X X ..... notices have partly or wholly escaped assessment and the income, profits or gains of the previous years which fall wholly or partly within the period beginning from September 1, 1939, and ending on March 31, 1946, and which have escaped assessment, amount to or likely to amount to ₹ 1,00,000 or more. Copies of the said notices are annexed to the petition and marked with the letter A . By the aforesaid notices, the partners of the said firm were requested to deliver to the said Income-tax Officer a return of the total income and the total world income assessable for the respective years mentioned in the notices. On or about July 2, 1956, the petitioner firm made an application to this court under article 226 of the Constitution, inter alia, for questioning the proceedings initiated by the said notices under section 34(1A), on the ground that section 5(7A) and section 34(1A) of the Indian Income-tax Act were ultra varies the Constitution, particularly articles 14 and 19 thereof. Thereupon this court issued a rule and granted in interim stay of proceedings. The application came up for hearing before me and on the 9th January, 1958, the application was dismissed and the rule was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ... a notice containing all or any of the requirements which may be included in a notice under sub- section (2) of section 22, and may proceed to assess or reassess the income, profits or gains of the assessee for all or any of the years referred to in clause (i)............: Provided that the Income-tax Officer shall not issue a notice under this sub-section unless he has recorded his reasons for doing so, that it is a fit case for the issue of such notice: Provided further that no such notice shall be issued after the 31st day of March, 1956. The learned standing counsel argues that the condition precedent for issuing notice under section 34(IA) of the Act is that the Income-tax Officer has reason to believe that certain facts exist which have been set out above. He must have reason to believe that income, profits or gains chargeable to income-tax within a specified period have escaped assessment and that the income, profits or gains which have so escaped assessment amount to, or are likely to amount to ₹ 1,00,000 or more. Another condition precedent is that the Income-tax Officer before issuing the notice must record has reasons for doing so and the Central Boa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing submissions to the court. Subsequently, however, the Income-tax Officer how actually issued the impugned notices and obtained sanction thereof from the Central Board of Revenue has affirmed and affidavit dated January 28, 1959, and an affidavit dated 23rd March, 1959. In the said affidavit he has stated as follows: (1) That at the material time he had in his possession considerable materials which led him to believe that income, profits, and gains of the petitioner firm amounting those several lakhs of rupees chargeable to income-tax, had escaped assessment for the years 1940-41 to 1945-46. (2) That he recorded his reasons for the aforesaid belief in writing and on the said reasons the Central Board of Revenue was certified that the present case was a fit case for issue of notice under section 34(1A) of the Income-tax Act. A copy of the relevant memorandum regarding the satisfaction of the Central Board of Revenue dated March 9, 1956, is annexed to the affidavit affirmed on the January 28, 1959. (3) that disclosure of the said reasons to the assessee at any stage prior to his compliance with the notice under section 22(4) and section 23(2) of the Indian Income-tax Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will be removed and/or altered and most of them will not see the light of day. I therefore, tried my best to see whether a solution could be reached. On the 27th February, 1959, the parties agreed to my giving certain directions. I directed that the respondents will send a list of the papers, documents and books of account which they require to be produced to the solicitor for the petitioner, and on the next day for hearing, the petitioner should inform the court as to which of the books, papers and documents mentioned in the list they are in a position to produce in court. The idea was that these books, papers and documents were to be produced in court and when produced the Income-tax Officer would be willing to hand over the particulars asked for. In other words, if the books and documents were produced, then the authorities were willing to give inspection of all the records, including the reasons recorded in writing by the Income-tax Officer and the sanction of the Board thereon. Pursuant to the directions given, the respondents sent a list to the solicitor for the petitioner. At the adjourned hearing, however, the learned standing counsel informed the court on behalf of the pet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hey are relevant run as follows: Rule 26(1). The Central Government or the Provincial Government, if it is satisfied with respect to any particular person that with a view to preventing him for acting in any manner prejudicial to the defence of British India, the public safety, the maintenance of public order, His Majesty's relation with foreign powers or Indian States, the maintenance of peaceful conditions in tribal areas or the efficient prosecution of the war it is necessary so to do, may makes an order:.... (b) directing that he be detained. Rule 129(1). Any Police officer,......may arrest without warrant any person whom he reasonably suspects of having acted, .........(a).......... in a manner prejudicial to the public safety or to the efficient prosecution of the war. On 21st August, 1944, the detenue Purushottam Yeshwant Deshpande was arrested pursuant to an order given by the Deputy Inspector-General of Police, under rule 129. A report of the arrest was node to the Provincial government which had directed that the detenue be detained in police custody for a period expiring on 4th September, 1944. This period was subsequently enlarged. In the meantime, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the person should be detained. It was held that a court of law could not enquire whether in fact the Secretary of State had reasonable grounds for his belief. The matter was one for executive discretion of the Secretary of State. In the Regulation concerned, there was two kinds of expressions used. In several places the Secretary of State was only required to be satisfied by something before the he could take action. On the other hand, the could take action under Regulation IA or 18B if he had reasonable cause to believe that a person was a member of a certain organisation and that it was necessary to exercise control over him. In his dissenting judgment which has become classical Lord Atkin pointed out that these two different expressions would not have been used if they meant the same thing. The majority judgment admitted that the argument was not without weight, but decided in the manner set out above. It has subsequently been pointed out that Liversidge's case* was a war-time decision and could only be supported because of the existence of an emergency. In commissioner of Income-tax v. Mahaliram [1940] 8 I.T.R. 442, the Judicial Committee was dealing with the point a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;in consequence of information in his possession' in clause (b) of section 34(1). These words in the amended section 34(1) suggest that the belief must be that of an honest and reasonable person based upon reasonable grounds, and that the Income-tax Officer may act under this section on direct or circumstantial evidence but not on mere suspicion, gossip or rumour. The powers in the present section are wide, but they are not plenary; the words of the section are 'reason to believe', and not 'reasons to suspect'. It will be observed that in this case conditions have been laid down for the exercise of the discretion provided in section 34 by the Income-tax Officer in issuing a notice thereunder. It is however of no direct assistance on the point, namely, as to whether and if so to what extent the reasons must be disclosed if an assessee comes to court and challenges the exercise of such discretion. In an unreported decision of the Madhya Pradesh High Court, Keshrichand v. Income-tax Officer, Khandwa, delivered by Bhutt, J., (judgment dated March 10, 1958), the point arose directly as to whether, even though an assessee may not be entitled to know the reason ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which he picturesquely described as a hole-and-corner policy. He argues that the English case regarding the police constable, Shearer v. Shields*, shows that upon a challenge being thrown, the constable would have to prove by evidence adduced in court that his suspicion was reasonable. Similarly, it is argued that upon a challenge being thrown, the Income-tax Office must adduce evidence in court to show that his belief was based on reasonable grounds. If it is a question of adducing evidence in court it cannot be ex parte evidence because that procedure would be violative of the rules of natural justice. Plausible as this argument sounds, let us see the implication thereof. After the assessment is complete, a notice could only be issued under section 34(1A), if the Income-tax Officer has reasons to believe that income, profits and gains have escaped assessment and it amounts or is likely to amount to a sum of ₹ 1,00,000 or more. Normally, this would mean that the assessee had suppressed disclosure of his real income. The Income-tax authorities might have various sources of knowledge and without an investigation it would be impossible to determine finally as to how the matte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the contention of the Income-tax authority, namely, that disclosure at this stage to the assessee would be prejudicial to the realisation of the revenue, or destructive of the proceedings altogether, then it should not be disclosed to the assessee at this stage, although the court may order that such reasons may be disclosed at a subsequent stage, that is to say, after the books and documents called for have been produced, or any other stage. As regards the point as to whether the court at this stage could look into the records without disclosing them to the assessee, I see no insuperable objection. There are manly instances in which the court is entitled to do so. Reference may be made to the provisions of Order XI, rule 19(2), of the Civil Procedure Code. The provision lays down that where, on an application for an order for inspection, privilege is claimed for any document, it shall be lawful for the court in inspect the document for the purpose of deciding as to the validity of the claim of privilege. This power has been explained in a Privy council case, Robinson v. state of South Australia*. In that case the plaintiff asked for discovery and inspection of certain State ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not entitled to look into the reasons recorded by the Income-tax Officer. The reason why the assessee is not entitled to do so is that the powers invoked relate to a machinery section and if the assessee is able to look at the reasons at this stage, the whole proceedings would be frustrated. If that be so, it is certainly not in the public interest that the reasons should be disclosed to the assessee by an indirect method, simply because the court has been given power to see as to whether these reasons exist or could justify the issue of a notice. After all, the court is not deciding the matter for itself. If the Income-tax Officer has come to a conclusion bona fide the court will not interfere. But simply because it is necessary for the court to satisfy itself in this behalf it does not follow that such reasons should be disclosed to the assessee. Such a course would destroy the very object and the provision of law in question, and therefore cannot be a reasonable interpretation of it. In this case I must record that the reasons and the sanction of the Board of Revenue have both been produced before me and I have looked into them. Having looked into them, I arrived at the opinion ..... X X X X Extracts X X X X X X X X Extracts X X X X
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